RBI’s Biggest Currency-Market Intervention Since 2013: What the New 20% Foreign Exchange Risk Reserve Actually Requires

On a Saturday — not a day RBI press releases usually land — the central bank announced what one currency strategist called “the most comprehensive set of currency-market measures since 2013.” The rupee had slid more than 7% over the year, sitting just above its all-time low, and Friday’s close of ₹96.735/USD left little room before the psychological ₹97 mark.

The RBI’s response had two distinct halves. The first was supply-side: starting Monday, 12 October, the Reserve Bank opened a special dollar window specifically for the three state-run oil marketing companies — Indian Oil, Hindustan Petroleum and Bharat Petroleum — supplying them dollars directly from its own reserves rather than leaving them to buy in the open spot market, where their daily import bill is one of the single largest sources of dollar demand in the economy.

The second half was demand-side, and this is the part that reaches every business that hedges a foreign-currency exposure. Via A.P. (DIR Series) Circular No. 26, Authorised Dealers (banks) must now maintain a Foreign Exchange Risk Reserve (FERR) — cash, held with the RBI itself, not merely provisioned on the bank’s own books — equal to 20% of the INR equivalent of the notional amount of any FX derivative contract that hedges a current-account exposure where the customer is buying foreign currency against the rupee, wherever that contract’s notional exceeds USD 2 million equivalent. The reserve sits with the RBI, reported daily through the Centralised Information Management System, until the contract itself terminates. The circular is explicit that splitting a transaction across one or more dealers specifically to duck the USD 2 million threshold is itself treated as a violation, not a workaround.

Sidebar: this isn’t the RBI’s first attempt at this exact playbook. The bank had already capped Authorised Dealers’ net open positions at USD 100 million earlier in 2026, and briefly barred non-deliverable rupee forward contracts before reversing that specific ban — this October package reads as the RBI returning to the same toolkit with considerably more force behind it.

Alongside the FERR — independently confirmed directly against RBI’s own A.P. (DIR Series) Circular No. 25 (RBI/2026-27/291, 10 October 2026, para 2(c)) — the threshold for hedging a contracted exposure without having to first establish the underlying exposure was cut from USD 100 million to USD 5 million — a twentyfold tightening — applying both to Authorised Dealers’ own-account dealing and, in parallel, to INR-denominated exchange-traded currency derivatives across India’s recognised stock exchanges combined. Dealers are also now barred from letting a customer rebook a cancelled rupee-linked derivative contract, and customers must give an undertaking that the same exposure hasn’t already been hedged elsewhere — both aimed squarely at preventing the same underlying position from generating artificial, repeated dollar demand. Separately, banks’ daily Cash Reserve Ratio maintenance floor rises from 90% to 99% of the prescribed CRR from the reporting fortnight beginning 16 October — tightening rupee liquidity in the banking system itself, on top of the FX-specific measures.

By Monday morning, the rupee had firmed roughly 0.6% in offshore non-deliverable forward trading — a real, if modest, move for a currency that had been sliding steadily since the start of the year.

Why It Matters

This is a genuine regulatory cost increase for anyone — not only banks — who hedges a foreign-currency payable or receivable through an Authorised Dealer. A business importing goods or services and hedging that exposure above the USD 2 million notional line will, through its bank, now be funding a 20% cash reserve with the RBI for the life of that contract — a direct liquidity cost of hedging that didn’t exist before 10 October 2026. For businesses and treasury teams that hedge smaller, more frequent exposures specifically to stay under large-transaction thresholds, the tightened USD 5 million no-underlying-exposure limit closes that route too.

Key Takeaways

• A new cash Foreign Exchange Risk Reserve of 20% of notional value applies to current-account FX hedging contracts above USD 2 million, held with the RBI until the contract terminates (A.P. (DIR Series) Circular No. 26, RBI/2026-27/292, 10 October 2026).
• Splitting a hedge across multiple dealers to stay under the USD 2 million threshold is explicitly treated as a violation, not a compliant workaround.
• The threshold for hedging without proving an underlying exposure has tightened from USD 100 million to USD 5 million — confirmed directly against RBI’s own A.P. (DIR Series) Circular No. 25 (RBI/2026-27/291, para 2(c)).
• Rebooking a cancelled rupee-linked derivative contract is no longer permitted; a fresh undertaking of non-duplicate hedging is now required from customers.
• Banks’ daily CRR maintenance floor rises from 90% to 99% of the prescribed ratio from the fortnight starting 16 October 2026 — a separate, liquidity-side tightening alongside the FX-specific steps.
• This is RBI’s most comprehensive currency-market intervention since 2013, following its 25-bps repo rate hike to 5.50% on 7 October — three distinct, connected policy moves inside one week.

Practical Implications

For CAs and finance teams advising importers, exporters, or any corporate with FX-hedged current-account exposure: the economics of hedging have genuinely changed, not just the paperwork. A 20% cash reserve locked up with the RBI for a contract’s full tenor is a real cost to model into treasury decisions going forward, and it applies per-dealer, so netting exposure across multiple relationship banks no longer avoids it the way it might have before the anti-splitting language was added. Clients already running FX hedging programmes should have their treasury or forex desk confirm with their Authorised Dealer, in writing, exactly how FERR is being computed and reported on their book — this is new enough that implementation detail is still settling.

Action Checklist

• For any client hedging a current-account FX exposure above USD 2 million notional, flag the new 20% FERR cost explicitly in treasury/working-capital advice — this is an added, real cash cost of hedging from 10 October 2026 onward.
• Confirm with the client’s Authorised Dealer bank how FERR is being calculated, held, and reported for existing and new contracts — do not assume continuity with pre-10-October practice.
• Where a client has historically split large hedges across multiple dealers for operational reasons, revisit that practice now that doing so to avoid the USD 2 million FERR threshold is an explicit violation.
• The USD 100 million → USD 5 million no-underlying-exposure threshold is now primary-verified against RBI’s own Circular No. 25 — safe to cite directly in a formal client opinion.
• Track the 16 October CRR-maintenance change (90% → 99% of prescribed ratio) separately for any client with banking-sector exposure or interest in short-term rupee liquidity conditions.

Relevant Sections & Notifications

RBI Press Release No. 2026-2027/1305 (10 October 2026); A.P. (DIR Series) Circular No. 26, RBI/2026-27/292 (10 October 2026) — Foreign Exchange Risk Reserve; A.P. (DIR Series) Circular No. 25, RBI/2026-27/291 (10 October 2026) — derivative exposure threshold; issued under the Foreign Exchange Management Act, 1999 (FEMA), within RBI’s Risk Management and Inter-Bank Dealings framework for Authorised Dealers.

FAQs

Does the new 20% Foreign Exchange Risk Reserve apply to every forex hedge, or only large ones? Only to current-account FX derivative hedges (buying foreign currency against the rupee) with a notional above USD 2 million equivalent. Smaller hedges below that threshold are not subject to this specific reserve requirement under Circular No. 26 — but structuring a larger exposure as multiple smaller contracts specifically to stay under the threshold is itself treated as a violation.

Who actually bears the cost of the 20% reserve — the bank or the customer? The circular requires the Authorised Dealer (bank) to hold the cash reserve with the RBI. In practice, banks typically pass this kind of regulatory cost through to the customer via pricing — clients should confirm the specific pass-through arrangement with their own Authorised Dealer rather than assume either outcome.

This article is prepared for general informational purposes only and does not constitute legal, tax, treasury or professional advice. Readers should consult a qualified Chartered Accountant or treasury/forex professional before relying on this summary for any specific hedging decision. The Foreign Exchange Risk Reserve requirement (Circular No. 26, RBI/2026-27/292) and the derivative-exposure-threshold change (Circular No. 25, RBI/2026-27/291) are both drawn directly from RBI’s own circulars, both dated 10 October 2026. Prepared by Finoscape Editorial Team — hello@finoscape.com.